The Silver Fix and Manipulation

In this month's Ask the Expert, Eric Sprott answers questions from our followers regarding the impact of geopolitical events, supply and demand data, manipulation, and the silver fix on precious metals prices.

The Gold Price Should be $5,000 or $10,000 and It Will be

Hopefully the commercials find that the game is getting less and less profitable, and ultimately we let the physical surplus of demand over supply determine the price. This would be very exciting because it’s not hard to imagine the price easily getting to $2,000. Of course there has been lots analysis done out there, whether it’s money supply or real inflation, on what the price of gold should be, and you get to $5,000 and $10,000, and I think that will all play out.

You know I look back and gold bonds used to be issued in the 1800s. And I saw an example of a gold bond that was issued in 1888. It had a 6 percent coupon, payable in gold. And I did the calculations of compounding the interest rate, compounding of the price of gold that has risen, and that $1,000 bond was worth $60 million today.

And I thought, you know what? That’s the story of gold -- that it protects you in (dangerous) environments, and it gives you this huge, outsized return, not withstanding these massively violent, brutal attacks, where everyone is trying to get you to stand away from the market. I hope all your (readers and) listeners have resilience, stay the course, and continue to buy as I will be buying, and I look forward to some wonderful returns going forward.

- Source, Eric Sprott via King World News

Where is the Supply of Gold Coming From?

I’m going to be knocked off my socks if something doesn’t happen with gold, but last year it was reported that we lost 700 tons in the GLD, which is physical gold that was sold into the market....

And here we are in 2014 and so far we are up about 12 tons (in GLD), so it’s no big deal. Maybe we will do 20 tons by the end of the year, but if you look at the dynamic of having 700 tons (of gold) not come to the market, and the GLD actually buying tonnage, you have a metric where you could see an 800 ton delta just in the GLD, in a 4,000 ton market.

Who is supplying this? Because supply is not going up. So I think that there are many, many reasons from a physical perspective that the gold market will be shockingly great this year, and that ultimately (with) the paper guys, there is going to be some problem that manifests itself here. Whether it’s taking delivery on the Comex, or the Chinese not receiving their gold, something like that has to happen with the kind of metrics we have.

- Eric Sprott via King World News

The Banking Industry is Way to Levered

A lot of the policy to keep the gold price suppressed is not going to work. How could anybody honestly believe that inflation is only 2 percent? It’s so ridiculous, and even the public is now realizing it’s ridiculous. The central planners have played a game that hasn’t worked, and there will be a price to pay.

When you see a bank goes down, what’s the first thing you think about? ‘I want my money out of the bank. Where am I going to put it all? I better put it into something real.’ We keep hearing that the bad loan problems are getting worse, the trading volumes for the commercial banks are going down, the spreads are narrowing. And I would never have my money in a bank. They are so levered and risky.

It’s funny that it doesn't strike people as being risky, but when you put your deposit into a bank, you've lent your money to the bank. If the money is lent to someone else who is not going to repay it, you are going to be on the hook for it. We just had the German government approve of bail-ins in that country. So we are all set up for it. Everybody knows there is going to be a problem in the banking industry because it’s just way too levered based on any normalcy in banking. So our day will come.

- Eric Sprott via King World News

Gold and Silver Prices Reek of Suppression

It’s hard for me not to think it’s imminent. When I got into the gold market back in 2000 I read Frank Veneroso’s gold book. He suggested that the central banks, who said they had 35,000 tons of gold, probably only had 18,000 tons.

And I see data every year that suggests demand might exceed supply by 2,000 tons. So the metal can come from only one place -- (Western) central banks. That’s why I wrote the article in 2012, ‘Do They Have Any Gold Left?’ Then you see data points out of the U.S., where the U.S. is exporting 40 tons of gold one month, and the U.K. is exporting 112 tons to Switzerland one month, and the U.K. doesn’t even produce any gold -- so where is this gold coming from?

These numbers all reek of the suppression of the gold price and tell you the game will have an end date. I think we might be very close to that end date now. I know lots of your readers and listeners will have seen a comment by some reporter from Bloomberg who suggested that the Bank of England's vaults were empty now. [LAUGHTER.]

And I suspect that is very close to the truth -- that the supply is dwindling, and someday they just give up on it. Like they should be giving up on the policy of money printing. They accomplished nothing. We’re so misguided on all this stuff. It’s not working. All we’re doing is piling on the debt. Well, there is a cost to debt and that cost gets bigger all the time.

- Eric Sprott via a recent King World News interview

Failure to Deliver Will Send Gold Higher

We have the Chinese coming in and buying an extra 1,500 tons (of gold). We will have a GLD metric that could be as much as 1,000 tons just this year, year over year. The Indians haven’t changed the laws yet but I think that will be forthcoming, and they can get back into normal buying mode....

We know that production is likely to fall off because of the lack of financing, the difficulty of getting projects approved, the unwillingness to go into projects, and the massive decline in exploration.

So if you look at it from a longer-term perspective, you can see that all the catalysts are in place. In terms of the immediacy of something, it’s going to be a failure to deliver. I don’t know where it’s going to occur, but it will be a failure to deliver somewhere.

- Eric Sprott via a recent King World News interview

Financial Sell Offs Should be Taken Advantage of by Investors

Sprott's Market Strategist David Franklin explains why investors should take advantage of current opportunities in the markets. Taped in Vancouver at Cambridge.

James West interviews Rick Rule, Chairman/Founder of Sprott Global Resource Investments

James West, the CEO of Midas Letter Financial Group, sat down with Rick Rule, the Chairman and Founder of Sprott Global Resource Investments to discuss the future of the Resource and Mining marketing, the stewardship of capital, and the LNG Export Rush occurring in Canada and the US.

The West Will Regret All Its Financial Policies Someday Soon Sprott

Video Podcast interview with Eric Sprott; by Lars Schall on behalf of Matterhorn Asset Management, Switzerland.

Are You Swayed or Afraid? A lecture by Sprott's Michael Kosowan

Sprott's Michael Kosowan ( delivers his lecture, Gold Stock Opportunities: Are You Swayed or Afraid? Taped at Cambridge Ho.

David Franklin, the Chief Market Strategist from Sprott Asset Management discusses the short-term future for gold. Solid information for investors here. Stay.

Join us at an upcoming event! Goldseek's Peter Spina ( talks about legendary investor George So.

Chairman of Sprott Global Resource Investments Rick Rule ( pulls back the curtain on 3 companies he's buying now.

The Physical Buyers Will Overwhelm The Paper Sellers

In this SNNLive Wall Street View, our host spoke with Eric Sprott, Chairman of Sprott Money Ltd. at the Silver Summit Conference in Spokane, WA.

Silver Will Go to $100 This Decade

In this SNNLive Wall Street View, our host spoke with Eric Sprott, Sprott Asset Management at the Hard Assets Conference in New York City.

Eric Sprott to sell 25 million shares in money management firm Sprott Inc

Eric Sprott, a former analyst who formed a brokerage firm before setting up his own money management firm two decades back and who is generally regarded as one of the country’s legendary precious metals’ investors, is reducing his stake in the company. He announced Tuesday he was selling at least 25 million shares in Sprott Inc. at $3 a share.

Of the 25 million shares being sold, 20 million come from a Sprott-controlled company and will be sold to the public via a bought deal. The balance will also come from a Sprott-controlled company and will be sold to the company’s employee profit sharing plan. If both stock sales are completed then Mr. Sprott will have reduced his stake in the company to 53.2 million shares, which makes him the largest shareholder in the company that was taken public in early 2008 at $10 a share.

Given Mr. Sprott’s age, the stock sales should not come as a complete surprise given his intention to reduce his role at the company. But he is not going too far as most of the proceeds from the sales will be reinvested in Sprott funds.

But the equity sales are noteworthy because they mark the first time that Mr. Sprott has sold shares to the public since going public in the spring of 2008. He has given some of his holdings to new executives who were hired (including, its understood, Kevin Bambrough and Peter Grosskopf) and to the employees profit share plan. Sprott, the company, has issued shares for acquisitions...

- Source, Financial Post, read the full article here.

What NOT to Do When Investing in Miners

By Eric Angeli, Investment Executive, Sprott Global Resource Investments

Precious metals miners are the most volatile stocks on earth. They're so volatile that investors often forget that underneath those whipsawing stock prices lie real businesses. But even many of those who consider themselves old pros in natural-resource investing tend to get one thing wrong. Eric Angeli, an investment executive with Sprott Global Resources and protégé of legendary resource broker Rick Rule, explains how not to fall into the "top-down" trap…

If the past two years have taught us anything, it's that trying to predict short-term moves in the gold price can be a road to ruin. Parsing the umpteen countervailing forces that combine to set the price of gold is tough. And it's even tougher when you consider that oftentimes, market-moving news, such as a central bank trade, isn't reported until after the fact.

In my years spent evaluating natural resource companies as a broker and analyst, I’ve found that there are two ways to successfully invest in precious metals equities. Doing it right can bolster the strength of your portfolio, not to mention your own confidence in your holdings.

Method #1—Top-Down Approach

You may have heard this method referred to as “Directional Investing.”

A directional investor decides that gold prices will increase in the long run. That's the starting point of his thesis. He then proceeds to find the companies that will be successful if his prediction comes true. He looks for companies with leverage to the gold price.

If an investor can get the timing right, this can be a lucrative strategy. There is an obvious caveat, though: for this strategy to work, precious metals prices must rise.

In my role as a broker, I deal with both companies and investors all day long. I can tell you that most speculators involved with gold equities use this top-down approach.

That's why the number one question I’ve heard over the last three months has been, “Why isn’t gold moving up?” To directional investors, the answer to this question is paramount.

This mindset leads to the herd mentality and, frankly, gives us our best bull markets.

I prefer method #2.

Method #2—Fundamental Approach

Fundamental investors ignore prognostications about where gold prices might move next. We eliminate gold price movements as the crux of our investment decisions, which removes a lot of the guesswork from our portfolios. For a fundamental investor, gold prices are still a piece of the puzzle, but they are not the only driver.

Fundamental investors want to know: which company has a promising deposit in a relatively safe jurisdiction? Which has a tight share structure? This “bottom-up” method, however, does require a lot more homework.

Fundamental investing is all about identifying the difference between a stock’s intrinsic value and the price at which it is trading at in the open market.

While I do believe in higher gold prices eventually—and inevitably—I know that short-term movements in the price of gold are beyond my control. I instead prefer to position my clients for success in the current environment. Instead of focusing on when the gold price will move—which we can never know—we focus on picking quality companies.

Why Hasn’t the Top-Down Approach Been Working?

You might say: because the price of gold hasn’t gone up! That's true, but there’s more to the story.

Until quite recently, gold has continued to rise, though not at the same clip we enjoyed after 2008. The problem is that miners' operating costs rose faster than the price of gold. Investors didn't expect that.

Nor did they factor in other cost increases. Sure, the value of a deposit rises every day the gold price rises. But did oil prices jump at the same time, making trucking the goods out more expensive? Did your laborers start demanding high wages? Did energy costs increase? Did the federal government demand a bigger slice of the pie?

Top-down investors can stop trying to figure out why they haven’t been correct over the last several years. They were correct on the gold price—but they ignored underlying cost factors.

The Top 7 Things to Look For

This is where the Fundamental Approach shines. All of your investments should fulfill a few key checkpoints:

1. Look for companies where management owns a large percentage of the stock. A vested interest at a higher share price is even better. 
2. Look for a tight capital structure. A bloated outstanding share count is a red flag. As is a history of management carelessly diluting away shareholder interest by issuing new stock. 
3. Look for a thrifty management team. A good company should spend their capital on projects, not swanky new offices. 
4. The company's mine should remain profitable even if gold drops to $1,000 per ounce. It could happen. 
5. Look for companies with enough cash to finance their current drill program, expansion plans, feasibility study, or construction phase. This year in particular, companies are having a very difficult time finding financing. Those who have adequate cash are diamonds in the rough. 
6. Know which countries support mining. A tier-one asset under the control of a wildly corrupt government isn't really a tier-one asset. You don't want to get caught in the middle of a government dangling final permits above managements’ heads. 
7. Know the geological potential of the exploration area. A four-million-ounce gold deposit is swell, but what if your company discovers not just one gold mine, but an entire new gold district? How will you factor in that upside? 

Don't Let Fear Make You Miss Out

Mining companies have a fiduciary responsibility to make their shareholders money, so they can’t help but paint a rosy picture for potential investors. That's why you need to have a disciplined and impartial eye. Most companies are not worthy of your hard-earned capital.

Having an advisor you trust, or access to technical expertise, is crucial. Ideally you should have both. The most educated investor always has the edge.

I'll conclude with this: the markets have not been kind to the miners recently. But selling a stock just because it dropped in value is an emotional decision. Seeing red on your computer screen is painful, but it is not relevant. What is relevant is what you do with that capital going forward. Don't let emotion cloud your judgment.

On the other hand, if you’re waiting for the gold price to move higher before you sell, then you’re a speculator masquerading as an investor, and you may as well buy a ticket to Vegas.

My boss and mentor, Rick Rule, recently said, “Bear markets are the authors of bull markets.” When these markets do start moving, if you’re not positioned with the highest-quality tier-one companies, you could miss out on one of the biggest bull market moves of your investing life.

Eric Angeli is an investment executive at Sprott Global Resources. You can reach him at eangeli@sprottglobal.com or by calling 1.800.477.7853.

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The article What NOT to Do When Investing in Miners was originally published at caseyresearch.com.